Good industrial space getting scarcer

While tenants still have the upper hand, the amount of quality space they have to choose from in the Atlanta industrial market is getting smaller on a daily basis, perhaps indicating that a limited amount of speculative construction is coming in the future.

According to a recent report from Colliers Atlanta, the 605.4 million-square-foot Atlanta industrial market ended second-quarter 2012 at 12.9 percent vacant, down from the 14.4 percent figure this time last year, and the first time since 2008 that vacancy has wound up south of the 13 percent mark. Total absorption for the first six months of the year totaled just under 3.3 million square feet, according to the report, a total representing a 40 percent increase over the same period in 2011.

Meanwhile, average direct net rental rates for the market as a whole ended the second quarter at $3.75 per square foot, down from an average of $3.79 at the same time in 2011, according to a midyear report from Cushman & Wakefield. “Although rates continue to fall, the pace of decline has slowed to less than 1.1 percent year-over-year,” the report said.

Major industrial lease deals done during the first half of 2012 include those by Owens Corning, which took approximately 1.1 million square feet, and Mobis Parts America, which took 301,152 square feet, both in the I-85 South corridor; a 900,640-square-foot build-to-suit in the I-75 South corridor by Georgia-Pacific; a 1.1 million-square-foot lease by Carter’s Inc. in the I-85 North corridor; a 450,000-square-foot lease by New Breed Logistics in the Fulton Industrial District/I-20 West corridor; and a 211,000-square-foot build-to-suit by Kuehne + Nagel Inc. in the airport area.

Notable action in the project-sales department included Duke Realty Corp.’s acquisition of the 569,674-square-foot Hartman Business Center V, located in the I-20 West corridor, for an undisclosed price; and, not far away, LaSalle Investment Management’s purchase of the 913,000-square-foot Quaker Oats distribution center in the Douglas Hill Business Center for a reported $40 million.

Leasing angles

Compared with 2011, there’s been a substantial increase in the number of leases done in the local industrial marketplace this year, according to Cushman & Wakefield Director James Phillpott.

Third-party logistics (3PL) services providers are playing an important role in at least one segment of today’s Atlanta industrial market, according to Phillpott.

“Their competitive advantage is being able to provide timely logistics services to their clients at the lowest possible price point,” Phillpott said. As a result, many 3PL firms are willing to lease space in older buildings, he notes, enabling landlords of class B and C industrial buildings to backfill space that has been vacated by tenants moving to newer, better-quality facilities.

Contrary to what you may think, though, increased activity on the part of 3PLs does not necessarily signal a resurgent economy, notes Jones Lang LaSalle Inc. Vice President Bob Robers.

“Most of the 3PLs I work with are busier than ever — but that in itself is not a very good indicator of a healthy or growing economy,” Robers said. “It can indicate that Corporate America is more uncertain about the future and feels less comfortable about investing in supply-chain infrastructure on its own — so they outsource more to the 3PLs.”

More spec on tap?

A lack of speculative construction over the past several years has led to some noticeable tightening of the market for newer, higher-quality industrial space, according to NAI Brannen Goddard LLC Director Brad Pope.

“We have had effectively no spec construction for the longest time, and at the same time, a lot of the better-quality buildings have been leased,” Pope said. “If you are a 400,000-square-foot or larger tenant looking for a class A industrial facility in Atlanta, you might be surprised at just how few available-space options there are out there.

“Everybody has been ‘trading up’ to newer, nicer space,” added Robers, “which has left the market with a lot of available second- and third-generation space, much of it with functional obsolescence and other issues.”

One result of this situation has been an increase in the number of users having buildings constructed specifically for their own use in the form of a build-to-suit, or BTS. “There’s lots of BTS activity now,” Pope said. “Companies are in talks with developers to get them going in almost every submarket in Atlanta.”

The new speculative industrial construction that could loosen things up a bit remains a relative rarity in metro Atlanta, at least for the time being.

One major facility, a 653,484-square-foot building by Industrial Developments International Inc. (IDI) in the I-20 West corridor, was under way at midyear. Earlier in 2012, Pattillo Industrial Real Estate broke ground on a 77,100-square-foot speculative industrial building at Gainesville Industrial Park. Meanwhile, there are new projects rumored to be gathering steam in the southern portion of the metro area by developers including Majestic Realty Co. and Exeter Property Group.

The measured pace of speculative projects getting under way will likely mirror that of the comeback in the industrial market.

“The Atlanta market is making a slow recovery,” Robers said. “And while we’re looking forward to some speculative development coming back, it certainly won’t get into full swing for some time to come.”